I am not an economist. I am a trader. Therefore I can't teach you
anything meaningful about the elasticity of demand or the Phillips
curve. But I can teach you about trend-following, momentum,
position-sizing, probability-weighting of trade ideas, risk
control, markets overreacting on emotions and the psychological
discipline you need to have not to do it yourself.
So what I am about to say about the global economy
and the threat to the US AAA credit rating must be taken in that
light. I may not know what I am talking about from an economics
standpoint. But I can sure tell you how the world works from a
trader and risk-taking investor's point of view. My perspective
might be useful when the unthinkable is about to happen.
It's All Relative
This is the phrase I used to use to teach people
about the world of currencies when I was an FX interbank market
maker for ten years. In a world of spiraling debt and trade
imbalances, the US dollar has seemed poised for an untimely death
for most of that decade.
The truth is that currencies of major economies
generally don't go to zero, despite all the parallels you can draw
between ancient Rome and the rise and fall of the US. What's more,
the likelihood of American innovation, productivity, and wealth
generation remaining on top of the world is much higher and more
sustainable than most want to admit.
Still, we have to answer hard questions about
exploding debt, unfunded liabilities, runaway spending, and
unbalanced budgets that turn deficits bigger than most other
economies. I don't know how to balance the budget and call me
somewhat cynical, but I doubt that anyone in Congress really cares
to know more than he or she cares about power and the next election
cycle.
So, what can we know? In June of 2009, I wrote the
following list for Greenfaucet.com in an piece titled "Strong
Dollar -- The Meaningless Debate." This article and others like it
were in response to prognosticators like Larry Kudlow, whom I
admire and respect, pounding their fist that quantitative easing
would be the death of "king dollar." The writing actually got me
invited on his evening show that summer. I'll explain what happened
in a moment.
10 Reasons Not to Worry
1) Little positive correlation between strong
equities and strong dollar. In fact, it's often a negative
correlation.
2) "King dollar" was a harsh reality during 2008
credit crisis that took EUR back to $1.25, not a measure of growth.
Dollar is still safe-haven of last resort when the defecation hits
the rotary oscillator.
3) Decades-long dollar depreciation reconvened in
March 2009 with equity bottom and QE-fed commodity "reflation."
4) China diversifying reserves is an old story
whose time has come. Will get priced in slowly. No panic here.
5) Bailouts, Deficits, Inflation-Oh My!
Generational, systemic crisis needs quantitative easing, more than
economy needs fiscal restraint.
6) Global economy needs U.S. economic vitality more
than U.S. needs a strong dollar.
7) Can't have BRIC/EM growth without risk appetite
in other major currencies. Can't have US growth without EM
growth.
8) Truth is that EU is in no better shape right now
-- the euro is not going to $1.75, but if it did, we'll adapt quite
well.
9) Oil -- the other gold -- and commodities in
general are the best inflation hedges, next to equities.
10) US is not a perfect economy, just the best and
only game in town. It's all relative in a global economy of fiat
currencies and wealth driven by productivity innovation.
This is by no means a perfect or complete list of
"reasons not to worry" about the dollar or the US AAA credit
rating. It was just a collection of my dominant thoughts and
arguments at the time two years ago. But you can see how many of
the ideas persist as relevant and accurate.
Dollar as Scorecard and Symptom
In June of 2010, I expanded on these ideas in more
detail as we enjoyed a strong dollar rally for most of the year,
just as I predicted it would come back when Europe's PIIGs started
flinging mud. My thesis about the dollar as "scorecard and symptom"
was that it would continue to reflect both our vital importance to
the global economy as well our obligations. I will reprint portions
of that article, with the above title, next time.
The balance between the dollar and other potential
reserve currencies is wrought by the fact that few other places to
put your money are as secure, even given all our money printing.
This is why I say "it's all relative."
And this is why you have to ask if it really makes
any difference if the ratings agencies downgrade the US from AAA to
AA this week or next. Who's really a AAA then? Should we all be
graded on a curve?
Wise investors have seen this coming for years. And
as much as China won't like the risks and the impact upon global
mood of, they are probably also prepared for the worst if some
investors should overreact to the downgrade.
See my "Debt Ceiling Compromise is Small C" for
more perspective on the watchful eye of China and the unique
symbiotic relationship our two economies share.
A Philosophical Viewpoint, Grounded in Real
Economic Experience
There you have it. My amateur-economist view of the
global economy, currency exchange rates, and sovereign debt. Take
it with a grain of salt, or aspirin. Or ignore it completely for
now. Just be willing to consider it at some point because I often
know what I'm talking about as the list above from two years ago
suggests. And I'm just trying to ease peoples' minds by talking
about how the world really moves money and why.
Sadly, they must have found a real economist for
that Kudlow show because they bumped me off a few hours before. I
know what you're thinking. "Their loss," right? (I tell myself that
Larry was afraid to have that debate with me, but I'm probably
going to far now.)
But controversy always seems to make better
"infotainment" than excellent predictions. Maybe I need to be more
controversial. I'm certainly not going back to school for my MBA,
much less a PhD, at this point. The real world school of trading is
much more profitable than any degree.
For more on what Emerging Markets mean to US
growth, see my recent articles on Caterpillar (CAT),
Apple (AAPL), Freeport-McMoRan Copper & Gold
(FCX), and Cummins (CMI) under the Tactical Trading
archive.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
APPLE INC (AAPL): Free Stock Analysis Report
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